The Government’s housing strategy, launched today, is intended to be a boost to economic growth. But by focusing entirely on the construction of new homes the Government has taken a very narrow view on how housing can stimulate the economy. For owner-occupied homes are a huge reservoir of wealth which could be converted into higher consumer spending, if we get the incentives right.
British households own around £3 trillion in housing wealth. Just converting a tiny amount of this into cash could boost consumer demand by billions. For the sake of the economy there couldn’t be a better time for those with housing equity to run-down some of their assets and use it to maintain their standard of living. People can do this by moving to cheaper homes and using the proceeds or, if they want to stay put, they can take out either a second mortgage or an equity release product. Overall the result would be that households would own a little less of the nation’s housing wealth and the financial sector, awash with money from quantitative easing, would take on a little more.
To make this happen the Government should introduce a simple, eye-catching voucher to encourage people to cash-in while times are tough. It could be modelled on the car scrapage scheme which offered people £2,000 to upgrade their car. That was an incentive to persuade drivers to spend from £10,000 upwards on a new car. The multiplier effect would be much greater if a similar voucher was used to unlock housing wealth, as the sums involved tend to be a lot higher: an average equity release is worth £50,000 and when people downsize their home the sums are at least as much.
The voucher could be used towards the upfront costs of moving for anyone making the shift to a cheaper home, or it could be a cash-back offer to top-up a financial product. How would it work? If the first, say, 50,000 applicants were eligible for £2,000 each for unlocking at least £40,000, that would unlock a minimum of £2 billion of cash at a cost of £100 million. Schemes like this always have some ‘deadweight’ costs, but today far fewer people down-size their home or take out cash than might be considered economically rational (at the last count only 15,000 equity release products were sold in a year). The attraction of the scheme would be partly to publicise the benefits of cashing in on housing and this might have lasting behavioural benefits.
The immediate beneficiaries of the scheme would be people with existing equity, who are mainly in mid and later life. In itself this may be no bad thing as many ‘asset rich’ older people live off very low incomes and could in principle spend a lot more of their money. But the scheme would also help free-up our sticky housing market. A good proportion of the cash would no doubt pass to younger relatives to help them raise a deposit for a home; meanwhile when older households downsize they would free-up larger homes: two different routes to boosting the volume of housing transactions, with all the wider economic activity this implies.
The obvious pitfall for this scheme is that it is regressive by design: a cash incentive to encourage people with wealth to spend it (although perhaps a mere £2,000 would not be much of an incentive to sell-up for the genuinely rich). It would only be distributionally fair as part of a broader package with more progressive elements (such a great deal for the Daily Mail reading classes might even buy political cover for other pro-poor elements of fiscal stimulus). Even if it were introduced on its own however, the very strong multiplier effect of the voucher means Keynsianism should beat socialism on this occasion. And if the scheme was successful in boosting house sales it might even be self-funding, through the proceeds from all that Stamp Duty.